Suppose you want to add the new guaranteed minimum withdrawal feature (see above) to an existing variable annuity, but the issuer doesn't allow that option. Are you out of luck? Not necessarily.
Strategy: Swap your annuity for another annuity. Assuming the trade qualifies as a "like-kind exchange" under the tax law, you'll pay no current tax on the deal. You can acquire a new annuity with the guaranteed benefit or tack it on after the exchange.
Do you qualify for tax-free treatment if one variable annuity has the guarantee feature and the other doesn't? It appears so, according to an earlier, nonbinding IRS private letter ruling.
In that ruling, the IRS said that swapping one annuity for another that also provides insurance coverage if the owner dies or becomes terminally ill before payouts start is a valid like-kind exchange. The IRS said the transfer didn't produce a tax liability, even though the trade of an annuity contract solely in exchange for a life insurance policy would be a taxable event. (IRS LR 8905004)
Tip: Consider all the ramifications before making the swap, not just taxes. For instance, you may owe a surrender charge if you trade in an annuity in the early years of ownership.
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